The rupee will strengthen slightly over the next 12 months, building on recent gains following a series of reforms by the government aimed at bringing its finances under control, a Reuters poll showed.
Those long-awaited reforms were welcomed by investors and revived capital inflows that have helped the currency after it was ravaged in the previous two years, hitting a record low of 57.32 in June last year.
The survey of 32 currency strategists conducted Feb 1-6 showed a median forecast that 53.24 rupees would buy one U.S. dollar in a month, little changed from current levels, with the currency possibly dipping back to 53.50 in six months and then recovering modestly to 52.50 in a year for a gain of around 1 percent.
The long run forecast was slightly weaker than that in the last poll in October, which showed the rupee at 52.39 per dollar in one month, 52.50 in six months and 51.70 in a year.
"The (Indian) rupee has dropped so much and so far that even if it makes half of those gains back, that will make rupee a stand out currency this year," said Vishnu Varathan, an economist at Mizuho Corporate Bank.
REFORM PLEDGES SPUR REBOUND
The losses in rupee in the last two years were mainly because of policy ineptitude over tackling a wide current account deficit, fiscal slippage and falling investment leading to threats of a downgrade to junk India's sovereign debt by rating agencies.
Since then the government has announced some measures like opening up the retail, banking and insurance sectors to foreign investors and small but important steps to reduce fuel subsidies to shore up its finances.
That along with major global central banks ultra-easy monetary policies have driven investor appetite for riskier assets and helped capital inflows into emerging economies.
After losing 3.5 percent in the full-year 2012, the rupee is Asia's best performing currency so far this year, firming more than 3 percent.
Foreign funds bought more than $4.5 billion worth of Indian shares and debt in January, helping the rupee gain 3.3 percent against the dollar in the first month of 2013, making it the best performing Asian currency.
But it is only expected to gain slightly over a year as plenty of concerns still remain about the government's commitment to implementing policy ahead of general elections early in 2014.
"We expect only a modest appreciation in rupee over the next year on continued capital inflows based on the government's reform approach," said Jyoti Narasimhan, a senior economist at IHS Global Insight.
"But the political situation is not necessarily conducive to aggressive reforms and most of the pending reforms will need to be parliament approved."
COMMITMENT TO REFORMS KEY
Although Asia's third-largest economy is heading for its slowest growth in a decade, it is expected to regain some momentum in the coming fiscal year as the impact of recent reforms kick in and as the central bank eases monetary policy.
The Reserve Bank of India cut its key repo rate for the first time in nine months by 25 basis points to 7.75 percent in late January.
But the central bank struck a cautious note on further easing as it waits to see the government's upcoming budget and watches whether inflation and a worryingly high current account moderate as expected.
India's current account deficit widened to a record high of 5.4 percent of gross domestic product in the September quarter as export growth slowed more sharply than imports.
India's Finance Minister P. Chidambaram has pledged to bring the country's finances under control and has slashed spending on welfare, defense and road projects, risking short-term economic growth and angering cabinet colleagues.
But with general elections slated for early next year, there are questions raised about the government's commitment to policy implementation for fiscal consolidation.
"The election and the pre-election climate will complicate policy making," Narasimhan said.
The biggest test for the government to show its commitment towards its policies will be at the end of the month, when it unveils the federal budget for the fiscal year starting in April.